Effect of Economic Crisis on HR Programs

Watson Wyatt has just released the April 2009 update of its bimonthly report on the effect of the economic crisis on HR programs. This report provides a real sense of the trajectory of events and the underlying economy before results show up in the lagging government statistics. For example among large employers 72% have already conducted layoffs and only 5% are expecting to impose layoffs in the next 12 months. This is a reversal from October when only 19% of large employers had implemented layoffs and 26% were projecting taking action. The report can be found on the WWW website and a link is provided below. I will highlight other key findings over the next week. You can subscribe to receive these updates through a google reader or other tool on the web by using the RSS button on the right.


http://www.watsonwyatt.com/news/pdfs/HR_Programs_April_Report.pdf

The Demise of Gross-Ups

Cari Tuna published an solid article in the April 21 Wall Street Journal on the demise of gross-ups for taxes on perks and golden parachutes. Ira Kay, Watson Wyatt's Global Exec Comp Practice Director, was quoted noting his support for eliminating gross-ups. As Ira has frequently pointed out this is an historic opportunity to eliminate expensive distractions and focus on the core pay for performance mechanisms that drive the US economic engine.

A Non-HR Topic of Interest.

For an interesting discussion on the future of reading and the implications of e-books look to the article entitled "Here comes the E-Book" in the April 20 Wall Street Journal.
http://online.wsj.com/article/SB123980920727621353.html

Market Pay, Deflation and Total Rewards

As a follow-up to last week’s discussion of the new variability of base pay several interesting points have been raised by the media and colleagues.

• As noted in the media, several states provide a unique program of offsets through unemployment insurance for across-the-board wage reductions. This approach is helpful to employers facing with the challenge of maintaining critical talent needed for an improving market and reduces state expenditures on unemployment. The long-term economic risk associated with base pay reductions lies in the creation of a deflationary spiral that could drag on the consumer side for the long-term. The HR implications are nothing short of the demise of the salaried employment model.


• Colleagues have also suggested and I believe rightly so that the “standard 3% on a contribution of 6%” 401k match will henceforth be consistently tied to organizational ability to pay in the form of adequate profitability. The goal of introducing the match initially was to encourage participation and insure an orderly growth in retirement assets that would be a floor for workforce planning. The profitability limitation reinforces the concept of all compensation as variable based on ability to pay and reintroduces a notion of profit sharing that has been fading from the lexicon of compensation design.


• Finally on health care benefits the issue has irrevocably moved to transferring costs and accountability to employees. Employers are increasingly willing to differentiate between employees based on health risk and explicitly limit participation in subsidized health benefits to employees willing to invest in wellness.

The New Variable Pay

Recent inquiries I have field from the media - print, radio and television - have been focused on changes employers are making to weather the economic storm. Fortunately Watson Wyatt is a research rich environment and has been conducting a bi-monthly flash survey that is capturing the curve of changes in this challenging environment. The link to the February press release is http://www.watsonwyatt.com/news/press.asp?ID=20684.

The short story is that companies are managing as rationally as possible. I have been counseling employers since last summer to be very careful about making significant reductions in force and about communicating and managing the survivor needs if a reduction is implemented. The data to date seems to indicate that among large employers the sizable reductions have already been completed and that cost saving actions are now taking the form of reductions in other people related expenses.

Why is this rational? Cuts were made early and quickly to adjust to falling demand with the largest cuts occurring in industries tied to consumer demand and of course to financial services and among contingent labor pools.

Why are substantial further cuts less likely? The last recovery cycle from 2002 to 2005 was referred to as the jobless recovery. Companies grew revenues from 2002 to 2008 based on increases in productivity with revenues per employee rising substantially over the past. Headcount management continued and contingent labor and consultants were often used to supplement internal staff and to implement significant initiatives.

So there really isn't really much in the way of further headcount cost savings to achieve before employers damage their ability to function. What's left are opportunities to reduce other people related costs such as 401k contributions, training and tuition reimbursements along with freezing salaries and shrinking bonuses.

In other words reducing the components of total rewards that are variable. The area that is relatively new to the variable equation is fixed cost base pay or salaries. This was previously considered a fixed cost. Now salaries are on the table with many employers going beyond simple pay freezes to actual base pay reductions. The current working assumption is that once the economy recovers these items will be returned to their previous levels but that is by no means a given.